NetFlix 2008 Annual Report Download - page 13

Item 1A. Risk Factors
If any of the following risks actually occurs, our business, financial condition and results of operations
could be harmed. In that case, the trading price of our common stock could decline, and you could lose all or
part of your investment.
Risks Related to Our Business
If our efforts to attract subscribers are not successful, our revenues will be adversely affected.
We must continue to attract subscribers to our service. Our ability to attract subscribers will depend in part
on our ability to consistently provide our subscribers with a valuable and quality experience for selecting,
viewing, receiving and returning titles, including providing valuable recommendations through our
recommendation service. Furthermore, the relative service levels, pricing and related features of competitors to
our service may adversely impact our ability to attract subscribers. Competitors include movie retail stores, DVD
rental outlets and kiosk services, Internet content providers’ online DVD subscription rental web sites and video
package providers with pay per-view and VOD content. If consumers do not perceive our service offering to be
of value, or if we introduce new services that are not favorably received by them, we may not be able to attract
subscribers. In addition, many of our subscribers are rejoining our service or originate from word-of-mouth
advertising from existing subscribers. If our efforts to satisfy our existing subscribers are not successful, we may
not be able to attract subscribers, and as a result, our revenues will be adversely affected.
If we experience excessive rates of churn, our revenues and business will be harmed.
We must minimize the rate of loss of existing subscribers while adding new subscribers. Subscribers cancel
their subscription to our service for many reasons, including a perception that they do not use the service
sufficiently, delivery takes too long, the service is a poor value, competitive services provide a better value or
experience and customer service issues are not satisfactorily resolved. We must continually add new subscribers
both to replace subscribers who cancel and to grow our business beyond our current subscriber base. If too many
of our subscribers cancel our service, or if we are unable to attract new subscribers in numbers sufficient to grow
our business, our operating results will be adversely affected. If we are unable to successfully compete with
current and new competitors in both retaining our existing subscribers and attracting new subscribers, our churn
will likely increase and our business will be adversely affected. Further, if excessive numbers of subscribers
cancel our service, we may be required to incur significantly higher marketing expenditures than we currently
anticipate to replace these subscribers with new subscribers.
Deterioration in the economy could impact our business.
Netflix is an entertainment service, and payment for our service may be considered discretionary on the part
of many of our current and potential subscribers. To the extent the overall economy continues to deteriorate, such
as in the case of a prolonged recession, our business could be impacted as subscribers choose either to leave our
service or reduce their service levels. Also, efforts to attract new subscribers may be adversely impacted.
If the market segment for online DVD rentals saturates, our business will be adversely affected.
The market segment for online DVD rental has grown significantly since inception. Some of the increasing
growth can be attributed to changes in our service offering, especially the ability of our subscribers to stream
movies and TV episodes on their TVs, PCs and Macs. Fluctuations in our rate of growth could indicate that the
market segment for online DVD rentals is beginning to saturate. While we believe that online DVD rentals will
continue to grow for the foreseeable future, if this market segment were to saturate, our business would be
adversely affected.
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